$9.2 billion derivatives losses for US banks in Q4

Kathryn Dick, the OCC’s deputy comptroller for credit and market risk, said that although banks had benefitted from strong client demand and wider bid-offer spreads, writedowns on bad credit assets continued to take their toll on trading results. The worst hit assets included collateralised debt obligations, leveraged loans and mortgage-related exposures.

In the fourth quarter, credit spreads on major dealers decreased after the US government intervened to stabilise the banking system. Meanwhile, credit spreads on many corporates increased with fears of a wider recession.

All other things being equal, the mark-to-market value of derivatives receivables moves up or down with the credit quality of a derivatives counterparty. Counterparties to derivatives trades generally also record a mark-to-market loss if their own creditworthiness increases. This effect also exacerbated trading losses on derivatives, said Dick.

In the fourth quarter, US banks lost $8.958 billion on credit derivatives, contributing to a $12.59 billion for the whole year. While a poor result, this was a slight increase on 2007, when US banks lost $12.67 billion, the OCC noted.

In interest rate derivatives, banks lost $3.42 billion in the last three months of 2008, although they still made $866 million in revenues during the year as a whole. Nevertheless, this represents a steep decline on 2007, when banks made $7.902 billion on interest rate derivatives.

A similar fall occurred in equity derivatives revenues, where US banks made $2.991 billion during 2007. However, in the fourth quarter of 2008, US banks lost $1.229 billion on equity derivatives books, bringing total annual losses in this area to $2.017 billion.

In foreign exchange, revenues were recorded at $4.093 billion during the fourth quarter. This contributed to total revenues of $11.363 billion during 2008, an increase of 62.9% over 2007.

In commodity derivatives, meanwhile, US banks made $338 million in the fourth quarter. This brought total revenues for the year to $1.543 billion, over four times the amount recorded in 2007.

The notional amount of derivatives held by insured US commercial banks increased by 14% to reach $200.4 trillion during the fourth quarter, largely as a result of the former US broker-dealers turning to commercial banking, according to the OCC. The figure comprised approximately $164.4 trillion in interest rate derivatives, making up 82% of total derivatives notional. It also included $16.8 trillion in forex derivatives, $15.9 trillion in credit derivatives, $2.2 trillion in equity derivatives and $1 trillion in commodity derivatives.

These contracts were concentrated in a small number of institutions, the report said, with the top four dealers – Bank of America, Citi, Goldman Sachs and JP Morgan – holding 94% of total notional derivatives volume among US banks. As the top dealer by notional value, JP Morgan held $87.4 trillion – just under half the total amount reported by the OCC.

A total of 1,010 insured US commercial banks reported derivatives activities at the end of the fourth quarter – an increase of 33 banks from the third quarter, according to the OCC.